Understatement Penalties Through the Cases

• Jurisdiction: South Africa
• Date: 01 April 2024
• Pages: 9-19
• Author: Annalie Pinch
• Published date: 01 April 2024
• Published By: Siber Ink
• DOI: 10.10520/ejc-btclq_v15_n1_a3

9

© Juta and Company (Pty) Ltd

Understatement Penalties Through

the Cases

ANNALIE PINCH*

ABSTRACT

The understatement penalty (‘USP’) provisions were introduced in the Tax

Administration Act in 2011 (‘the TAA’) with effect from 1 October 2012. These

provisions stipulate, amongst other things, when the South African Revenue

Service (‘SARS’) may impose understatement penalties, when no penalties

may be imposed, how the penalty must be calculated and when penalties

imposed must be remitted. In particular, the USP rules require there to be

an ‘understatement’, as defi ned in section 221 of the TAA. However, where

an understatement arises from a ‘bona fi de inadvertent error’, no penalty

may be imposed. This term is not defi ned and has accordingly been the

subject of many disputes between taxpayers and SARS, resulting in the term

being considered by the tax court, the Supreme Court of Appeal (‘SCA’)

and currently the Constitution Court, as discussed in this article. While SARS

adopts a narrow view of what constitutes a bona fi de inadvertent error, the

SCA held in CSARS v The Thistle Trust (Thistle)1 that SARS was not entitled

to levy an understatement penalty because the taxpayer made an error,

but did so in good faith and acted unintentionally. In Commissioner for the

South African Revenue Service v Coronation Investment Management SA (Pty)

Ltd (Coronation),2 the SCA held that the understatement arose from a bona

fi de inadvertent error because it resulted from the taxpayer relying on a tax

opinion from a tax practitioner.

The TAA also stipulates that the burden of proof is on SARS in respect of the

facts on which SARS bases the imposition of an understatement penalty. The

onus of proof has similarly been the subject of case law, resulting in a clearer

understanding of the requirements that SARS has to meet in imposing under-

statement penalties. In terms of Purlish Holdings (Pty) Ltd v The Commissioner

for the South African Revenue Service (Purlish Holdings)3 and Enviroserv Waste

Management (Pty) Ltd v The Commissioner for the South African Revenue

Service (Enviroserv),4 SARS must show not only that the taxpayer committed

the conduct envisaged in the defi nition of ‘understatement’ (e g, an incor-

rect statement in a return), but also that such conduct resulted in prejudice

suffered by SARS or the fi scus. Furthermore, it was held in Purlish Holdings that

‘prejudice’ is not limited to fi nancial prejudice.

1

* Senior Consultant, Bowman Gilfi llan.

2023 (2) SA 120 (SCA).

2

2023 (3) SA 404 (SCA).

3

(76/18) [2019] ZASCA 04.

4

(154/2022) [2023] ZASCA 180.